Principal Agent Conflict

Principal Agent Conflict

Principal-Agent Relationships

The companies have a host of principal-agent relations as the set of contracts in light of the company involved. Agency problems, monitoring, moral hazard, and costs are often evaluated by investors to determine the risk of owning shares in a corporation.

Principal-Agent Conflicts

Principal-agent relationship exists when one person or party is working in the interests of the other party. Some of these relationships arise through binding contractual relationships and some may be informal or hidden relationships that are revealed only at a point in the future.

The set of contracts model of the modern corporation shows that many stakeholders are affected, both formally and informally, by the corporate entity. One of the moral problems that managers of a company faced is to keep the company profitable and at the same time remaining aware of the ethical dilemmas of the maximization of shareholder wealth to the detriment of other stakeholders. Is the main purpose of the critical to take into account only the interests of the owners? What do the owners of the reduction of shareholder wealth to meet the moral obligations to other stakeholders? The principle of self-interested behavior indicates that managers of a company to act in its own interest. What happens when acting in their own interests creates moral problems to shareholders and stakeholders?

An example of Principal-Agent Conflict

Suppose a company had a profitable quarter with record sales and retention of a large amount of cash from normal operations. This unexpected result is the direct employees, the owners of the agents who have worked hard to maximize business and thus shareholder wealth. The managers of the company must decide how best to use the extra money that goes around a liquid asset?

The managers have decided that money should be used for one of two purposes: the salary increases to reward employees for the hard work he has created an additional income or pay a big dividend to shareholders as a reward for investing capital necessary to make additional income.

The principle of self-interested behavior suggests that shareholders want the dividend option as it means more wealth for them. Employees, however, would prefer to wage increases for the same reason. Self-interest principle also suggests that managers take the decision that you want the increase in wages, since it would mean more money in their pockets.

This example illustrates the conflicts that may arise in principal-agent relationships. In fact, I imagine that as and incentive for the company as profitable as possible, part of managers' compensation package of shares includes shares in the company. The complexity of the agency theory becomes even clearer, because managers will benefit from a wage increase, whether or distribution of a dividend. The astute manager will make a bit of calculation to determine which alternative or combination of the two alternatives to maximize their own interest.

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